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FX Gets A Sugar High From Talk Of Stimulus

By Kathy LienForexAug 19, 2019 06:00PM ET
www.investing.com/analysis/fx-gets-a-sugar-high-from-talk-of-stimulus-200456498
FX Gets A Sugar High From Talk Of Stimulus
By Kathy Lien   |  Aug 19, 2019 06:00PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup August

Investors are dipping their toes back into US assets. Stocks traded higher for the third day in a row, Treasury yields rebounded off their lows and the greenback started the week stronger against all of the major currencies. These moves had nothing to do with data as there are no major US economic reports on the calendar this week. Instead, currencies continue to be driven by headline risk and the prospect of fiscal and monetary easing. For the US in particular, there’s talk that the White House is considering a payroll tax cut to stimulate the economy. We know that President Trump is not satisfied with the extent of interest rates cuts so if the Federal Reserve continues to under-deliver, his only option will be fiscal stimulus. A payroll tax cut would be cheered by the markets, US business and consumers but it needs to be approved by Congress and the Democratic controlled House will be reluctant to back it because payroll taxes fund Social Security, a program they are actively looking to expand. Yet the mere talk of stimulus is enough to give investors a sugar high, particularly since the US is not the only country talking about more fiscal stimulus.

As noted by our colleague Boris Schlossberg, “German Finance Minister Olaf Scholz said on Sunday, that Berlin could make available up to 50 billion euros of extra spending in case of a slowdown. While the figure is relatively modest, it is the first sign that the notoriously frugal German policymakers are finally starting to understand the need for action as Europe’s largest economy is coming dangerously close to tipping into a recession.” This provided initial support to the euro but by the end of the NY session when the currency turned lower and extended its slide for the fifth day in a row. With the ECB expected to increase stimulus next month and this week’s PMI numbers likely to be weak, the risk is to the downside for EUR/USD. Support is at the August low of 1.1027 but the key level to watch is 1.10.

The tone of trading tomorrow will most likely be determined by China, who will announce the details of their new Loan Prime Rate program at 9:30 am local time (9:30 pm NY). The new fluctuating LPR replaces their existing fixed benchmark lending rate and is updated the 20th of every month. By allowing the rate to float, they are basically allowing interest rates to fall. The current fixed rate sits at 4.35% and hasn’t changed in nearly 4 years. When the new program launches tonight, the rate will be set lower and could continue to fall. The lower the rate, the more positive the reaction in the market. Aside from this rate cut, investors are also waiting for fiscal stimulus from China.

Keep an eye on the Australian and New Zealand dollars as they will be most sensitive to China’s announcements. The minutes from the last Reserve Bank of Australia meeting is also scheduled for release along with New Zealand’s dairy auction. When the RBA met, they downplayed the need for additional easing by talking up the strength of the labor market. AUD is weak so if the minutes are more dovish, the currency could tumble on expectations for another rate cut this year.

FX Gets A Sugar High From Talk Of Stimulus
 

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FX Gets A Sugar High From Talk Of Stimulus

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Comments (10)
Partap Singh
Partap Singh Aug 20, 2019 7:04AM ET
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thank you Kathy
Sayfu Deen
Sayfu Deen Aug 19, 2019 11:05PM ET
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great article.could you please give your point of view on bakkt?
Korind araro
Korind araro Aug 19, 2019 10:25PM ET
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thanks Kathy,your are the great analysis
Stefano Donati
Stefano Donati Aug 19, 2019 10:15PM ET
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good stuff. happy trading!
ik ik
ik ik Aug 19, 2019 9:31PM ET
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thank you Kathy
Nick Roth
Nick Roth Aug 19, 2019 8:35PM ET
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Great as always thank you.
Agiel Duhaney
Gilles94 Aug 19, 2019 7:15PM ET
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Agree   with  your   analysis , Kathy  Great!
Hidar Mamood
Hidar Mamood Aug 19, 2019 6:50PM ET
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Thanks for the heads up!
Paul Biggers
Paul Biggers Aug 19, 2019 6:26PM ET
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Thanks Kathy!
Papa Akumia
Papa Akumia Aug 19, 2019 6:08PM ET
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Does this mean a turnaround tuesday tommorow for equities? Yes
 
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